The Federal Reserve’s record monetary stimulus has compelled central banks from Mexico to Japan to follow suit, said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co.
The Fed’s “artificially low” benchmark interest rate has put upward pressure on several currencies, threatening to erode the competitiveness of those nations’ economies, El-Erian said in a speech today in Stanford, California. “Ultimately, they are forced -- Mexico has been forced, Brazil has been forced, Korea has been forced, Japan has been forced -- into doing exactly the same thing” as the Fed.
The U.S. central bank has kept its main interest rate near zero since December 2008 and is engaged in a third round of bond purchases to spur economic growth and reduce 7.7 percent unemployment. As a result, the Fed has become the equity investors’ “best friend” and a “price-setter” in financial markets, El-Erian said.
Chairman Ben S. Bernanke “pivoted” in 2010 and started using “imperfect tools,” leaving the balance of benefits and costs unclear, El-Erian said at a conference at Stanford University. He compared Bernanke’s approach to a pharmaceutical company that releases inadequately-tested drugs.
While the costs of the Fed’s $85 billion in monthly bond purchases are currently “very isolated” and financial markets are in a “sweet spot,” he said the longer-term outlook is “unusually uncertain.”
The Standard & Poor’s 500 Index climbed yesterday to within two points of its record closing level of 1,565.15 set in October 2007. The gauge has more than doubled from its bottom in 2009, fueled by corporate earnings that topped estimates and monetary stimulus from the Fed. The Dow Jones Industrial Average set an all-time high for the eighth day in a row yesterday.
Stocks fell today as a report showed U.S. consumer confidence unexpectedly weakened in March. The S&P 500 declined 0.2 percent to 1,560.90 at 1:26 p.m. in New York, while the Dow was down 0.3 percent to 14,500.01.